UPS or FedEx: Which Company Is Best at Keeping Its Customers Loyal?

We know that parcel delivery is a two-horse race between UPS and FedEx, but do you know which company is better at retaining its customers?

The movies always make it seem so easy to send a package. Either you're watching some futuristic plot where you can beam a package halfway around the world in a fraction of a second or you can simply attach it to the leg of a hawk and have it hand-deliver it for you.

Source: UPS.

Of course, things in the real world are a bit different. Email and digital correspondence have dramatically changed things for parcel delivery companies around the world, causing them to rethink how they interact with consumers and price their services. Consumers have seen a shift as well, with just a handful of tried-and-true parcel delivery choices left to choose from including UPS(NYSE:UPS), FedEx(NYSE:FDX), and the U.S. Postal Service.

But for all intents and purposes, this is a two-horse race between UPS and FedEx, with the Postal Service bleeding red ink and looking more like a dinosaur with easy passing day.

In 2013, for example, Bloomberg noted via an inspector general's report that FedEx and UPS combined for 98% of all annual shipping costs from federal agencies. Keep in mind the USPS sends government correspondence at a reduced rate, and it still only garnered 2% of the government's shipping funds. I'll give the USPS a little benefit of the doubt in that it lacks the large sales presence of UPS or FedEx, but it also lacks their express delivery guarantees, too. That tells you something about the market share dominance of both UPS and FedEx.

Yet, according to research firm Brand Keys, one of these two parcel delivery companies is a nose above the other when it comes to driving customer loyalty. Utilizing its proprietary Customer Loyalty Engagement Index Brand Keys was able to determine, to no one's surprise, that the U.S. Postal Service ranks dead last in parcel delivery loyalty. However, it was also able to determine which of these two package-delivering foes is better at forming a bond with consumers, which can be crucial to driving long-term growth.

Today, we're going to look at which of these two package expediters is king of the customer loyalty mountain, but first, let's take a step back and examine why customer engagement and loyalty even matter in the first place.

Why customer loyalty matters to the parcel delivery industry Sectors that are a veritable duopoly, such as parcel delivery, may not seem like a business where a high emphasis on customer engagement and loyalty would come into play. However, with digital technologies weighing on the need to send mail and packages in the first place, both companies' margins are under constant pressure. There's pressure to "outgrow the other guy," while also maintaining margins through price increases. Unfortunately for FedEx and UPS, they can't simply raise their prices to their hearts' content because they would otherwise drive away their core customer. Thus is born the balancing act between going the extra mile for the customer and growing their business.

Therefore, both UPS and FedEx attempt to court customers with attractive but consistent pricing as well as instilling the "delivery guarantee," which is so important to the consumer. Through physical stores that are easily accessible and scattered throughout the world, these parcel delivery services have a better chance at proving their dependability and convenience to the customer and being able to pass along what are inevitable price increases in the future without losing this sorely needed source of cash flow.

In other words, without loyal customers, FedEx and UPS would be in big trouble.

UPS or FedEx: Which is tops in customer loyalty? The skinny, of course, is that both are pretty darn good at what they do. Having little in the way of competition in an industry that has a monstrously high barrier to entry has allowed both companies to excel over the long run. Both even have high brand-value retail customers that they can almost exclusively call their own with Apple often using FedEx and retailer giant Amazon leaning heavily on UPS.

But one parcel delivery company is just a bit better at retaining its customers. Before I reveal that company, would you care to venture a guess as to who it is?

Got your pick?

Raise your hand if you said UPS, because you deserve a pat on the back. You're correct!

I suspect there are a number of factors at work that helped push UPS ahead of FedEx in terms of customer loyalty.

First, although both are somewhat similar in size (UPS has close to 100,000 more employees), UPS has a clear-cut advantage in terms of service locations and history. It has 64 additional years of company history under its belt than FedEx, which was founded in 1971, making it the logical choice to appeal to multigenerational groups of people.

But it's more than just history; it's about convenience. According to FedEx Office's website, there are more than 1,900 FedEx Office locations in the U.S. By comparison, UPS has 4,756 UPS Stores, about 1,000 customer service centers, 13,000 authorized outlets, and 40,000 drop boxes. That spells a lot of convenience for consumers -- and convenience drives a big portion of the parcel delivery industries' customer loyalty.

Another factor to consider is the benefits employees of each company receive. While UPS and FedEx are similar in many ways, one fairly big difference is that UPS allows its workers to unionize whereas FedEx has generally opposed it. Please keep in mind the bias of the following data as it comes from the UPS Teamsters union, but in 2010 it calculated (link opens PDF) that the average UPS driver made $17.88 more an hour, predominantly on the health benefits and pension side of the equation, than the average FedEx driver. Generally speaking, a better cared-for worker in terms of wages, health benefits, and retirement benefits is more likely to stick with a company longer and represent the brand in a positive light. The lesson here is never underestimate the power that treating your workers well can have on your public image and the attitude that your employees portray to the public.

Finally, size does matter. According to shipping research firm PackageFox, UPS ships more than double the number of packages per day than FedEx, although FedEx's fleet of jets handily surpasses that of UPS. Ultimately, UPS does meet customers' needs with its ability to deliver 91% of express packages on time compared to a still-impressive 88% for FedEx. Obviously, each has its own advantages and disadvantages to the other (UPS being the king of ground delivery and FedEx having the superior air fleet), but UPS' ability to get packages to their destination on time better than FedEx is bound to win it customers for life.

Industry dynamics are changingInvestors should keep in mind that the parcel delivery sector is still very dynamic. Last year's surge in online orders toward the end of the year clogged UPS' delivery centers, resulting in a number of delayed packages during the holidays. However, I would contend that UPS is more than up to the task of improving its operations to handle the ongoing switch to everything digital and is setting shareholders up for impressive returns over the long term due to its ability to attract and retain customers for life.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong